Bank lending to the eurozone private sector shrank in September for the first time on record, the European Central Bank said on Tuesday, a stark warning that any recovery is fraught with uncertainty. Lending contracted by 0.3 percent in September, a bank spokesman said, after growing by just 0.1 percent in August.
It was the first time the figure was negative since the bank's records began in January 1992. "There are still few signs that the ECB's unlimited provision of liquidity to banks is prompting any pick up in eurozone broad money and lending," Capital Economics economist Ben May commented.
The central bank is to release its latest quarterly survey of bank lending on Wednesday and "the credit cycle remains the biggest question mark on the timing and the extent of the recovery in the eurozone," UniCredit economists Loredana Federico and Davide Stroppa wrote. Growth of the ECB's wider M3 money supply indicator, which measures cash, deposits and various other financial items, fell to 1.8 percent in September from a revised 2.6 percent in August, the ECB spokesman said, also a record low.
Lending and money supply data reflect consumer demand and overall activity in an economy. A falling figure points to lower demand, which normally means inflation will ease and allow the ECB to cut interest rates. However, ECB rates are already at a record low of 1.00 percent and are not expected to be cut further. ECB president Jean-Claude Trichet has warned meanwhile that "uncertainty remains high" regarding a recovery from the eurozone's first recession and analysts say credit could get tighter as demand from business rises.
"Tight credit conditions remain a serious handicap to recovery prospects," IHS Global Insight chief European economist Howard Archer said. Previous declines in lending were believed to stem from weaker demand from businesses and households owing to the global economic downturn.
Recent data has shown however that business activity in the 16-nation eurozone picked up in October at its fastest rate since December 2007, although a sustained rebound is also threatened by rising unemployment. May noted that there was "little sign that conditions in the banking sector are becoming more normal', suggesting that it remains too early for the ECB to think about removing its generous liquidity provisions, let alone raising interest rates." The ECB has provided unlimited amounts of cash to commercial banks in a bid to spur activity in interbank markets and increase lending to the broader economy.
But the banks have held on to much of the money because they are wary of borrowers' business prospects and also because they need to bolster their own weakened balance sheets. The UniCredit economists did see some encouraging signs in the ECB data, especially in the household sector where growth in lending for home purchases appeared poised for a pick-up. Commerzbank economist Michael Schubert noted that even if a recovery did begin in the second half of this year, "a turning point in (overall) loan growth may not be reached before early 2010."
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